The tax season is soon approaching, and if tax refund figures are similar to 2016, over 100 million U.S. residents could see a tax refund! In fact, according the IRS’s figures compiled after the late filing deadline in October 2016, the average total refund was $2,777 — a 1.8% increase from 2015. We have our fingers crossed that those amounts keep rising! If you are lucky enough to receive a tax refund, there are undoubtedly some exciting ways to use it — vacations, shopping sprees, and more. However, you may want to explore more financially prudent avenues to put your tax refund dollars to work. To help guide you, here are our top 6 financially responsible ways to use your tax refund dollars:
- Make a Larger Payment on Your Student Loans or Other Debt
Use your extra funds to pay off or pay down any outstanding student loans or other debts like credit cards, car loans, or home mortgages. Doing so can reduce the total amount of interest you pay over the life of your loan(s). For the most effective repayment plan, focus your efforts on the the loan(s) with the highest interest rates. However, before you start committing extra funds to one particular loan, find out if you can refinance and consolidate any of them — such as student loans and home mortgages – into a new loan package that offers more favorable rates. If you do this ahead of time, you will know exactly which loan(s) will continue to have the highest interest rate(s) and where to focus your extra tax refund dollars.
- Create a Savings Account/Emergency Fund
Most financial experts suggest saving at least six months’ worth of your monthly expenses as an emergency fund. For example, if you need $4,000 a month to pay for your living expense bills and to buy food, then you will need to have at least $24,000 in your savings account. These funds can come in handy during a period of unemployment or other financially challenging moments in life. If that amount seems too far out of reach, start with a modest initial emergency savings goal of $1,000, which should cover many basic car or home repair costs and help you avoid accumulating additional debt. You can read more about budgeting strategies and percentages on Investopedia. Need more help creating a budget? Check out our blog, “Creating a Monthly Budget,” as well as other related topics on the ELFI blog.
- Set Up a Retirement Account
Next, consider saving for your future — that is, your retirement account. Creating a Roth account, whether it is a traditional or Roth IRA, contributing to a 401(k), or setting aside funds in some other retirement plan is a great way to ensure that you will be financially comfortable later in life. Most financial experts suggest setting aside 20 percent of your income towards your retirement.
- Start Investing
If you already have a great plan in place for savings, retirement, and financial emergencies, then you might want to consider using your tax refund dollars for other financial goals, like investments. That way you can earn additional income that ideally earns more than your savings account. Want some investing tips? Try starting with these financial gurus.
- Donate to a Charity
Charitable giving is a great way to use your tax refund dollars in a profound way. The financially savvy benefit? If you play your cards right and make a tax-deductible donation to an eligible organization, you may be able to write off your charitable contribution on your tax returns. Not only could you help increase the amount of your tax refund , but you will likely feel great about giving to a deserving cause. For more tips on choosing a worthy charitable organization, check out our blog: “Charitable Giving Basics and Your Budget.”
- Invest in Yourself
We call this worthy section a personal investment in yourself, because rather than going on a shopping spree, it is a great idea to consider using your tax refund money for personal growth. Take a class in something you are passionate about. Travel somewhere that will supplement your life, your career, your self-employed business, your craft, or your trade. Furthermore, if you really just need a re-energizing vacation, and your personal finances are in great shape, go for it!
There you have it: our top 6 financially savvy ways to use your tax refund dollars. We hope that your tax refund is just what you expect it to be — and possibly more! That way, you can use your extra funds to help get the new year off to a great start or to supplement a financially stable future. For more great tips on finances and using your tax refund dollars, visit Mint’s “10 Smart Ways to Use Your Tax Refund” and the ELFI blog.